Oil price hike, surge in debt issuance help GCC avert sharp cut in reserves

GCC countries were able to avert an otherwise sharper deterioration in their international reserves on the back of an increase in oil prices and a subsequent positive impact on current account balances, Moody's Investors Service said on Monday.
Large sovereign external debt issuance valued at $49.3 billion in 2017, up more than $10 billion from 2016, also helped the GCC in avoiding a steep decline in reserves.
Combined foreign exchange reserves of the six-nation GCC reached an aggregate $634 billion as of October 2017, about $63 billion lower than a year before and down by $270 billion from their August 2014 peak, the ratings agency said.
"However, given that GCC sovereigns opted for similar maturities, there will be a spike in repayments in 2021-22 and 2026-27, with funding conditions unlikely to be as beneficial as they had been over the past two years. In our view, Bahrain and Oman are the most vulnerable GCC sovereigns in terms of tightening liquidity conditions," analysts at Moody's said as they gave a negative outlook for sovereign creditworthiness in 2018.
GCC's international sovereign bond and sukuk issuance was at record high in 2017. GCC sovereigns issued a combined $49.3 billion in international bonds and sukuk in 2017, up more than $10 billion from 2016. Saudi Arabia accounted for 44 per cent of the total, including $9 billion in sukuk with maturities of five and ten years, and $12.5 billion in three tranches of conventional bonds (five, ten, and 30 years). Abu Dhabi issued $10 billion in October (in three tranches of 5, 10, and 30 years maturities), and Kuwait $8 billion in its debut international bond in March 2017 (5 and 10 years). Oman raised $7 billion in 2017, comprising a three-tranche conventional bond (5, 10, and 30 years), and a $2 billion, 7-year sukuk. Bahrain issued $2.2 billion in international bonds in September 2017, maturing in 2029 and 2047, respectively, which followed a $600 million re-tap of an existing bond in February.
"External issuance has prevented a sharper reduction in international reserve buffers, but also introduces new risks," said Moody's.
The ratings agency said that unlike other regions of the world, higher and more stable global growth would not provide much uplift to the GCC's growth outlook.
"Although oil prices have risen significantly from their trough in early 2016, most sovereigns in the region will continue to run sizable fiscal deficits and record an increase in their debt burdens. Moreover, long-standing geopolitical event risks have come to the fore again and will play an important role in defining sovereign credit quality in 2018," said Steffen Dyck, a Moody's vice-president, senior credit officer and the report's author.
Three of the six GCC sovereigns hold negative rating outlooks, while the remaining three have stable outlooks, pointing to the likelihood of fewer downward rating adjustments in 2018 compared to 2017.
Moody's forecasts a slight pick-up in GDP growth of close to two per cent in 2018 for the GCC as a whole. While this would be an improvement from GDP stagnation in 2017, aggregate growth will remain well below the average 5 per cent per year seen between 2010 and 2015, given flat oil and gas production and a slow recovery in non-oil growth.
Moody's outlook came in the wake of a report by S&P Global Ratings retaining the sovereign 'AA' ratings of Abu Dhabi and Kuwait on the back of large stocks of external assets, and irrespective of a sharp fall in oil prices.
"Large stocks of external assets, as a percentage of gross domestic product, provided the economies of these two sovereigns with a significant buffer following the sharp fall in oil prices in mid-2014," the ratings agency said in its Middle East and North Africa sovereign ratings outlook.
According to Moody's, GCC fiscal buffers will remain strong on aggregate, but also with clear variations between sovereigns. "We estimate that official financial buffers stood at $2 trillion (around 140 per cent of the regional GDP) at the end of 2017, about 5.4 times the aggregate GCC-wide general government debt. Due to the expected further rise in government debt and continued use of these buffers to finance fiscal deficits, this multiple will decline to around 4.5 times in 2018 - still a formidable cushion." - issacjohn@khaleejtimes.com